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GROWTH AND CORRUPTION

This paper delves into the relationship between corruption and economic growth, using indices from the BI and ethnolinguistic fractionalization. It analyzes how corruption affects investment and overall economic efficiency.

edwardherrera
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GROWTH AND CORRUPTION

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  1. GROWTH AND CORRUPTION

  2. Introduction • Malfunctioninggovernmentinstitutions as severeobstacles to investment, entreprenuership and innovasion • Inefficientjudicial system • Lowsecurityofproperty right • Cumbursom and dishonestbureaucracies • DebateontheimpactofCorruptiononGrowth • Positive impactongrowth • Negative impactongrowth

  3. Introduction (cont’d) • Although most economists agree that efficient government institutions foster economic growth not much is know about the magnitude • The paper tries to identify the channels through which corruption and other institutional factors affect economic growth and the magnitude of the effect • In order to fix the problem of endogeniety the index of ethnolinguistic fractionalization is used as an instrument for the institutional factors • The paper found that corruption lowers investment and growth

  4. Data • The BI Indices of Corruption and Institutional Efficiency • Data gathered from BI correspondents and analysts based in each country • Nine selected indices: insitutional change, social change, oppostion takeover, stability of labor, relationship with neighbors,terrorism, judiciary system, red tape and corruption • All BI indices are postively and strognly correlated • E.g., corruption vs red tape • Bureaucratic efficiency proxied by the average of judiciary system, red tape and corruption indices • Political stability proxied by the average of the other six indices

  5. Data (cont’d) • All thenineindicescan be aggregated to give an averageindexofinstitutionalefficiency • Richercountries and fast growingcountriestend to have betterinstitutionsthanpoorercountries. But, thereareexceptions: Thailand (most corruptbutgoodeconomicperformance) and Korea (fast growthbutrelativelyinefficientinstitutions) • Strongassociationbetweenbureaucraticefficiency and politicalstability: there is strondcorrelationbetweentwovaribles and most countrieslie in the same quintilebasedonthetwoindices (thisdoes not apply to all countrieshowever)

  6. Data (cont’d) • The fact that the indices reflect the subjective opinions of BI’s correspondents has both advantages and disadvantages: • the addvatage is related with the political stability variables. • One disadvantage is the problem of unclear scale of measurement. • An even more serious disadvantage that the correspondents evaluation of the difference indices might have been influenced by the economic performance of the country • In addition to the possible measurement error, economic perfomance may affect institutional effieciency • In order to fix the problem of endogeniety arising either from measruement error or geniunn endogeniety, an index of ethnolinguistic fractionalization was used as an instrument

  7. Data (cont’d) • The Index of Ethnolinguistic Fractionalization (ELF) and Other Variables • The raw data from which ELF index was constructed refer to 1960 and the source is Deparment of Geodesy and Cargography of the State Geology Committee of the USSR 1964 • The criteria for characterizing groups as ethnically separate was based on historical linguistic origin • The ELF index can be given as follows: ELF = 1- Where ni is the number of people in the ith group, N is the total population and I is the number of ethnolinguistic groups in the country.

  8. Data (cont’d) • Assumed that ELF is is exogenous and unrelated to economic variables except through its effects on institutional effeciency; it is a valid instrument • Negative and significant correlation between institutional efficiency and ethnolinguistic fractionalization. Ethinic conflict may lead to political instability. The presence of many different ethnolinguistic groups worsens corruption • ELF index is a valid instrument only for institutional efficiency index • Varible related with collenial history was also used based on the data sources of Encyclopedia Britannica and the World Handbook of Political and Social Indicators

  9. Emperical Estimates • Corruption and Investment • Corruptionaffectsinvestment rate negatively and significantlyboth in the OLS and 2SLS estimatesusingthe simple corruptionindex • The magnitude is alsoconsiderable: a one SD increase in thecorruptionindex is associatedwith an increase in theinvestment rate by 2% of GDP • The slopecoeffiecientdoes not significanltydiffer in low-red-tape and high-red-tapesub-samplesofcountries • Similarresult is observedwhenthebureaucraticefficiencyindex is used insteadofthe simple corruptionindex

  10. Empirical Estmates (cont’d) • Equipmentinvesmentwhich is more relatedwithgrowth is significanlty more closelyassociatedwithbureaucraticefficiencythannonequipmentinvestment • Boththe simple corruptionindex and bureacraticinefficiencyarenegativelyassociatedwiththeinvestment rate evenaftercontrolling for a varietyofother determinants ofinvestment • The mainchannelthroughwhich bad institutionsaffectthegrowth rate is by loweringtheinvesment rate

  11. Empirical Estimates (cont’d) • Corruption and Growth • The corruption and the bureaucratic effieciency indices both significantly affect average per capita GDP growth • The result is robust to different specification of control variables • The null hypothesis of no relationship between investment and corruption can be rejected at a level of significance higher than the null hypothesis of no relationship between growth and corruption can • In the context of an endogenous growth model, bureaucratic inefficiency could affect growth indireclty through investment or directly • Similarly, in neoclassical growth models, corruption could affect the steady-state level of income • E.g, through missallocation of production among sectors

  12. Empirical Estimates (cont’d) • Wheninvestment is included as a an independent variable in thegrowthregression, thebureacraticefficiency and corruptionindiceswilleitherbecomeinsignificant or theirslopebecomesmaller • Investmentmayalso be affected by growth (endogeneity problem) • 2SLS was used usingthenine BI indices • There is onlyweak support for thehypothesisthatcorruptionreducesgrowth by leading to inefficientinvestmentchoices • A considerableportionoftheeffectsofcorruptionongrowthworksthroughitseffectsonthe total amountsofinvestment

  13. Conclusion • The negative associationbetweencorruption and investment as well as growth is significant in both a statistical and an economicsense • The result is robust to differentregressionspecificationsincluding IV estimation and inclusionof relevant factors • Three areas for furtherresearchinlcude • The positive and significantcorrelationbetweenindicesofbureaucraticefficiency and politicalstabilty • Stratagiccomplementaritymay be oneexplanation

  14. Conclusion (cont’d) • The behavior of different types of governments with respect to the compostion of government expenditure; e.g, corrupt governements may invest less on education • The reverse causal link from poverty to bad institutions; persistent poverty may lead to bad institutions

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